Time for a Bounce?

The S&P500 dropped again last week, this time almost 1.5%. Volume was moderate, but certainly not at any level suggesting that some sort of panic selling had taken place. Volatility actually declined slightly, also suggesting that last week’s selling was not very worrying. Breadth, however, deteriorated badly. New highs minus new lows dropped notably. And the percent of stocks above the 50 day moving average fell to its second lowest level of the year.

Macro fundamentals were not strong for the US last week. Retail sales, both headline and ex-autos, missed expectations. Initial jobless claims soared to the highest levels of the year, but some of this increase came from catch up filings after Hurricane Sandy. The Empire State Manufacturing survey disappointed, and the Philly Fed survey missed very badly. Finally, industrial production also missed consensus estimates by a mile.

But the week ended on a positive note….stocks rose on Friday. Why? Because there was a hint of a possible deal between Washington Democrats and Republicans on the fiscal cliff. And while there was nothing concrete announced, and while most folks in DC will be out of town until the week after Thanksgiving, this change in sentiment was enough to send stocks higher.

The major reason is technical. The S&P500 was very oversold by the end of last week. Over the course of the last 6 weeks, it had dropped over 100 points, slicing through the 50 day moving average and then the 200 day moving average, without so much as a breather.

So the market needed an excuse, any excuse, for shorts to cover and traditional longs to “buy on the dip”. And this one day rebound could last a little longer. It wouldn’t be surprising if the S&P bounced back to at least the 200 day moving average (around 1382) or even close to the 50 day moving average (about 1429).

Remember, such a bounce would not break the downtrend that began in September. It would merely be a normal and common reaction to oversold conditions, and one that should fail at either of the two major moving averages which will now act as resistance, or a ceiling, against further gains.

And further gains would require some major positive news News such as corporate earnings rebounding, US macro data turning around, reduced tensions in the middle east, improved fundamentals in Asia, real solutions to the euroland crisis, and meaningful US fiscal reforms.

Needless to say, than none of the above is very likely. And if any one of these political or economic risks flares up again in December or January, then selling would instantly resume.

Who knows, maybe this time the selling will be for real—with volume soaring and volatility spiking.

And if this happens, then some attractive buying opportunities would likely appear, at least for the short to medium term.

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